C-17 Aircraft: Cost of Spare Parts Higher Than Justified (Letter Report,
04/17/96, GAO/NSIAD-96-48).

Pursuant to a congressional request, GAO reviewed the pricing of certain
spare parts for the C-17 aircraft, focusing on those spare parts that
experienced significant price increases when the contractor decided to
produce them in-house rather than purchase them from outside vendors.

GAO found that: (1) the Air force paid higher prices for 33 selected
spare parts formerly procured under subcontracts; (2) the costs of
manufacturing spare parts are 4 to 56 times higher when the contractor
began producing its parts in-house; (3) the contractor's use of outdated
labor variance factors in developing proposed costs resulted in its
overstating the costs of 37 spare parts by $117,000; (4) the contractor
earned higher profits than warranted because the contracting officer
based the profit objectives on a firm, fixed-price contract, but later
negotiated prices for spare parts, which should have reduced the
contractor's risk and profit margin; and (5) the Defense Contract
Management Command recovered $182,000 from the contractor for overpriced
parts.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-96-48
     TITLE:  C-17 Aircraft: Cost of Spare Parts Higher Than Justified
      DATE:  04/17/96
   SUBJECT:  Spare parts
             Military aircraft
             Air Force procurement
             Procurement regulation
             Overpayments
             Military cost control
             Equipment contracts
             Aircraft components
             Contract monitoring
IDENTIFIER:  C-17 Aircraft
             
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Cover
================================================================ COVER


Report to the Honorable Charlie Rose
House of Representatives

April 1996

C-17 AIRCRAFT - COST OF SPARE
PARTS HIGHER THAN JUSTIFIED

GAO/NSIAD-96-48

C-17 Aircraft

(705082)


Abbreviations
=============================================================== ABBREV

  DCMC - Defense Contract Management Command
  DFAR - Defense Federal AcquisitionRegulation Supplement
  DOD - Department of Defense
  DPRO - Defense Plant Representative Office

Letter
=============================================================== LETTER


B-259369

April 17, 1996

The Honorable Charlie Rose
House of Representatives

Dear Congressman Rose: 

As you requested, we reviewed the pricing of selected spare parts for
the C-17 aircraft.  Our review concentrated on a limited number of
spare parts that experienced significant price increases when
McDonnell Douglas decided to manufacture the parts at its St.  Louis
plant rather than buying them from outside vendors.  The results of
our work cannot be projected to the universe of spare parts being
procured for C-17 aircraft.  However, DOD officials acknowledge that
the issues we identified are not limited to the specific parts we
reviewed, but may have broader applicability. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The C-17 is being developed and produced by McDonnell Douglas.  The
Congress has authorized procurement of 40 C-17 aircraft through
fiscal year 1996.  As of October 1, 1995, McDonnell Douglas had
delivered
22 production aircraft to the Air Force.  In November 1995, the
Department of Defense (DOD) announced plans to buy an additional 80
C-17 aircraft. 

In addition to procuring the aircraft, the Air Force is purchasing
spare parts to support the C-17.  The Air Force estimates the total
cost for initial spares--the quantity of parts needed to support and
maintain a weapon system for the initial period of operation--for the
first 40 C-17s to be about $888 million. 

In January 1994, we reported that the Air Force had frequently
ordered C-17 spare parts prematurely.\1 We noted that premature
ordering occurred because the Air Force used inaccurate and outdated
information, bought higher quantities than justified, or did not
follow regulations governing the process.  As a result, DOD revised
its guidance to limit the initial procurement of spares, and the Air
Force canceled orders for millions of dollars of C-17 parts. 

Initial spares for the C-17 are being procured under two contracts. 
Some are being provided under the C-17 development contract through
interim contractor support.  That support, which started in mid-1993,
involves providing spares and technical support for two C-17
squadrons through June 1996.  As of May 31, 1995, the Air Force had
spent about $198 million for interim contractor support. 

The remaining initial spares are being procured under contract
F33657-81-C-2109 (referred to in this report as contract-2109). 
Under this contract, the Air Force, as of May 31, 1995, had obligated
$120 million for initial spares, but negotiated prices for only about
$29 million of the spares.  The $91 million balance was the amount
obligated for parts ordered on which prices had not been negotiated. 

McDonnell Douglas produces some spare parts in its facilities at the
Transport Aircraft Division at Long Beach, California, where the C-17
is being produced, or at other locations, such as its Aerospace-East
Division at St.  Louis.  It also subcontracts for the production of
parts.  The subcontractors may be responsible for all aspects of part
production or McDonnell Douglas may furnish materials or complete
required work. 


--------------------
\1 C-17 Aircraft Program:  Improvements in Initial Provisioning
Process (GAO/NSIAD-94-63, Jan.  21, 1994). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Our review indicates that the Air Force paid higher prices for spare
parts than is justified.  First, for 33 selected spare parts formerly
procured under subcontracts, we found that costs are from 4 to 56
times higher after McDonnell Douglas moved the work in-house.  For
example, McDonnell Douglas paid an outside vendor $389 to machine a
door hook that it subsequently machined in-house at its St.  Louis
Division at an estimated cost of $8,842. 

Second, costs for some spare parts are higher than justified because
McDonnell Douglas used outdated pricing data that overstated its
proposed prices.  We found that in developing the proposed costs of
selected spare parts, McDonnell Douglas used outdated labor variance
factors, which resulted in prices being overstated by 34 percent
($117,000) for 37 parts. 

Third, the profits awarded on some orders under contract-2109 appear
higher than warranted.  The contracting officer used Defense Federal
Acquisition Regulation Supplement (DFARS) guidelines to calculate
profit objectives and negotiate profit rates with the contractor that
are documented in a memorandum of agreement.  The contracting officer
developed the government's objectives based on the risks of a
fixed-price contract.  However, most costs were known when the order
prices were negotiated; therefore, the contractor's risks were lower
than in a fixed-price environment.  Also, the contracting officer
used a higher performance risk factor than appears appropriate when
McDonnell Douglas is buying spare parts from subcontractors.  Based
on profit rates that our calculations suggest could have been
justified, McDonnell Douglas would have received less profit. 

As we discussed our findings with DOD officials during our review,
they began taking actions to address those findings.  For example,
the Defense Contract Management Command's (DCMC) Defense Plant
Representative Office (DPRO) at McDonnell Douglas calculated that the
overpricing of spare parts was $182,000 and recovered that amount
from McDonnell Douglas in December 1995.  Also, DOD stated that other
actions are being taken to prevent these overpricing problems on
other spare parts. 


   HIGHER COSTS FOR PARTS MADE
   IN-HOUSE
------------------------------------------------------------ Letter :3

The Air Force paid higher prices for 33 spare parts than appears
reasonable when compared to McDonnell Douglas' historical costs.  The
33 spare parts were ordered under contract-2109 and manufactured by
McDonnell Douglas' St.  Louis Division.  The Long Beach Division had
previously purchased them from subcontractors for production aircraft
at much lower costs.  The St.  Louis Division's estimated costs were
from 4 to 56 times greater than the prices that Long Beach had paid
outside vendors several years earlier.  The parts were in sections of
the C-17 assembled by the Long Beach Division for the first four
aircraft, but assembled by the
St.  Louis Division for subsequent aircraft.  For 10 parts, McDonnell
Douglas had previously purchased the complete part from a
subcontractor.  For the other 23 parts, it had furnished material to
a subcontractor that manufactured the part. 

While our examination of price increases was limited to 33 spare
parts, an Air Force-sponsored should-cost review\2 identified
potential savings of $94 million for the C-17 program if work is
moved from McDonnell Douglas' St.  Louis Division to outside vendors
or other McDonnell Douglas facilities.  Air Force officials said that
the $94 million savings related only to components for production
aircraft.  They said that the savings would be higher if spare parts
were included. 


--------------------
\2 A specialized cost review designed to promote improvements in
contractor's operations by challenging such things as existing
workforce, methods, materials, and facilities and quantifying their
impact on price proposals. 


      PARTS PURCHASED COMPLETE
---------------------------------------------------------- Letter :3.1

We identified 10 parts--7 hinges on the air inlet door to the C-17's
air conditioning system, 2 cargo door hooks, and a door handle on the
C-17's vertical stabilizer access door--that McDonnell Douglas had
previously purchased complete from a subcontractor at much lower
costs.  Information on previous purchase costs, McDonnell Douglas'
manufacturing costs, and the price that the Air Force paid for each
of these spare parts are included in appendix I.  Details on one of
the hinges follow. 

The Air Force paid $2,187 for one hinge on the air inlet door to the
C-17's air conditioning system.  The hinge (see fig.  1) is aluminum,
about 4 inches long, 2 inches wide, and ranges from about 1/16 of an
inch to 1-3/8 inches thick. 

   Figure 1:  Hinge

   (See figure in printed
   edition.)

   Source:  McDonnell Douglas.

   (See figure in printed
   edition.)

The Long Beach Division, which assembled the air conditioning inlet
door for initial production, purchased 14 of these hinges from a
subcontractor in 1988 for use on production aircraft at $30.60 each. 
It had also paid the vendor $541 for first article inspection and
$2,730 for reusable special tooling.  These costs, however, would not
have been incurred on future orders. 

In 1992, McDonnell Douglas transferred the air conditioning inlet
door assembly work to its St.  Louis Division and that division made
the hinge for production aircraft and for the spare part order.  The
estimated cost for the spare hinge was $1,745, and, with overhead,
profit, and warranty factors, the Air Force paid $2,187 for it.  The
fact that the subcontractor had made the hinge from a special casting
while the St.  Louis Division machined the hinge from bar stock could
be one cause of the higher price. 


      PARTS WHERE MCDONNELL
      DOUGLAS FURNISHED MATERIAL
---------------------------------------------------------- Letter :3.2

We identified 23 parts--21 different cargo door hooks and 2 different
hinge assemblies--where McDonnell Douglas had previously furnished
material to a subcontractor who produced the parts at much lower
costs.  Information on previous purchase costs and McDonnell Douglas
manufacturing costs are included in appendix II.  Details on one of
the door hooks follow. 

The Air Force paid $12,280 for one of the hooks.  The hook (see fig. 
2) is made of steel and is about 7 inches high, 3-1/2 inches wide,
and about
4-1/2 inches thick. 

   Figure 2:  Hook

   (See figure in printed
   edition.)

   Source:  McDonnell Douglas.

   (See figure in printed
   edition.)

For the early production aircraft, the Long Beach Division had
furnished material valued at $715 to an outside vendor in 1992 who
manufactured this hook for $389 (exclusive of the material value). 
After initially using hooks for production aircraft provided from the
Long Beach Division's inventory, the St.  Louis Division made them
starting with production aircraft number 12.  For the spares order
under contract-2109, the
St.  Louis Division estimated "in-house" manufacturing costs
(exclusive of material costs) at about $8,842. 

McDonnell Douglas officials said that the primary reason for moving
various work from the Long Beach Division to the St.  Louis Division
was to recover from being behind schedule and that sufficient time
was not available to procure parts from vendors.  McDonnell Douglas
officials also said that now that production deliveries are on
schedule, they will be reviewing parts to identify the most
affordable and effective manufacturing source and that 17 of the 33
parts have been identified as candidates to move out of St.  Louis to
achieve lower C-17 costs. 

DOD advised us that DPRO officials at McDonnell Douglas had estimated
the cost difference between production by McDonnell Douglas versus
subcontractors for the 33 parts to be $141,000 and, after further
analysis,\3 had determined that $65,000 was excessive.  McDonnell
Douglas refunded that amount in December 1995. 


--------------------
\3 DOD's further analysis included (1) eliminating an amount to be
refunded because of another of our findings and (2) adjusting the
earlier purchase prices used in our cost comparison to reflect what
DPRO believed are more realistic outsourcing prices for McDonnell
Douglas. 


   DATA FOR PRICING SPARE PARTS
------------------------------------------------------------ Letter :4

Our review of the data submitted to support the pricing of selected
spare parts orders showed that McDonnell Douglas' St.  Louis Division
used outdated pricing information when proposing costs under
intercompany work orders with the Long Beach Division for the C-17
spares.  The St.  Louis division used labor variance factors based on
the second quarter of 1992 for proposing labor hours required for
items produced in 1994.  Most of these orders were negotiated with
DCMC in mid-1994. 

As of May 31, 1995, DCMC had negotiated prices for 95 contract items
made by the St.  Louis Division with a total negotiated value of
about $966,000.  We reviewed data for 37 of these items with a
negotiated total value of $347,000.  We reviewed only labor variance
factors and did not address other rates and factors such as the
miscellaneous production factor.  We found that the selected items
were overpriced by $117,000, or about 34 percent of the negotiated
value of the items reviewed. 

For example, McDonnell Douglas, in developing the basic production
labor hours estimate for a hinge assembly multiplied machine shop
"target" hours by a variance factor of 2.33 and sheet metal target
hours by a variance factor of 2.5.  Data for the first quarter of
1994 showed a conventional machine shop variance of 1.26 and a sheet
metal variance of 1.60.  Because most work for this item took place
in the first half of 1994 and the prices were negotiated in June
1994, the 1994 variance rates should have been used for pricing the
item.  Instead, McDonnell Douglas used rates based on the second
quarter of 1992, which were higher.  A price of $42,587 was
negotiated based on the 1992 data.  Using the data for the first
quarter of 1994, the price would have been $26,458, a difference of
$16,129, or about 38 percent lower than the negotiated price. 

After we brought these issues to the attention of DOD officials, they
acknowledged that more current labor variance data should have been
used and sought a refund.  McDonnell Douglas made a refund of
$117,000 in December 1995. 


   PROFIT UNDER SPARE PART ORDERS
------------------------------------------------------------ Letter :5

Our review indicated that the profits awarded for some orders under
contract-2109 appear higher than warranted.  DFARS requires the use
of a structured approach for developing a government profit objective
for negotiating a profit rate with a contractor.  The weighted
guidelines approach involves three components of profit:  contract
type risk, performance risk, and facilities capital employed.  The
contracting officer is required to assess the risk to the contractor
under each of the components and, based on DFARS guidelines,
calculate a profit objective for each one and, thus, an overall
profit objective.  As a general matter, the greater the degree of
risk to the contractor, the higher the profit objective.  For
example, the profit objective for a fixed-price contract normally
would be higher than that for a cost-type contract because the cost
risk to the contractor is greater under the former.  Consequently, in
its subsequent price negotiations, the government normally will
accept a higher profit rate when a contractor is accepting higher
risks. 

The price of spare orders under contract-2109 were to be negotiated
individually.  However, rather than calculate separate profit
objectives and negotiate profit rates for individual orders, DPRO and
McDonnell Douglas negotiated two predetermined profit rates,
documented in a memorandum of agreement, that would apply to
subsequent pricing actions.  The profit rates were 10 percent for
parts that McDonnell Douglas purchased from subcontractors, and 15
percent for spare parts that McDonnell Douglas manufactured.  Our
review indicates that the use of these rates for many later-priced
spares resulted in higher profits for the contractor than would have
been awarded had objectives been calculated and rates negotiated when
the orders actually were priced.  Based on profit rates of 6 percent
for purchased parts and 13 percent for parts made in-house, both of
which could have been justified according to our calculations,
McDonnell Douglas would have received less profit.  For example,
applying these lower profit rates to the $29 million of negotiated
spare part orders as of May 31, 1995, would have reduced the
company's profit by $860,000. 

After we presented our information in October 1995, DCMC directed
that the memorandum of agreement, which was scheduled to either
expire or be extended on November 1, 1995, be allowed to expire and
that future profit objectives be established on an order-by-order
basis.  DOD officials agreed that a single profit analysis should not
be used for C-17 spare parts. 


      CONTRACT TYPE RISK
---------------------------------------------------------- Letter :5.1

In developing a profit objective for contract-2109, the contracting
officer assigned a value for contract type risk based on firm,
fixed-price contracts.  However, negotiations of prices for spare
part orders were conducted, in many cases, after the vendor or
McDonnell Douglas had incurred all costs and delivered the spares. 
These conditions lowered the contractor's risk for those parts far
below what normally would be expected for a firm, fixed-price
contract.  The risks were more like those that exist for cost-type
contracts, for which the weighted guidelines provide lower profit
objective values. 

Of the 40 parts made in-house that we reviewed, McDonnell Douglas had
delivered 25 (63 percent) of the parts at the time of price
negotiations with the government.  Five of the remaining 15 items
were delivered during the month of price negotiations, and all were
delivered within 3-1/2 months of price negotiations.  Of the 55 "buy"
spare parts we reviewed, McDonnell Douglas had established prices
with its vendor for 45 (82 percent) of the parts.  Using one order as
an example, McDonnell Douglas (1) negotiated spare parts prices with
its subcontractor on January 25, 1993; (2) negotiated prices with the
government on April 11, 1994; and (3) scheduled the parts for
delivery on May 27, 1994.  Thus, for both make and buy items, a
substantial portion of the contractor's costs had been known at the
time of the price negotiations. 

Section 217.7404-6 of DFARS requires that profit allowed under
unpriced contracts reflect the reduced risk associated with contract
performance prior to negotiations.  Consistent with this requirement,
the weighted guidelines section (215.971-3) requires the contracting
officer to assess the extent to which costs have been incurred prior
to definitization of a contract action and assure profit is
consistent with contractor risk.  In fact, the guidelines provide
that if a substantial portion of the costs has been incurred prior to
definitization, the contracting officer may assign a contract type
risk value as low as zero, regardless of contract type. 

A DPRO representative said that, in negotiating the memorandum of
understanding, DPRO knew that the two profit rates for later
application would not be perfect in every case.  He said, however,
that they were expected to be off in one direction as often as in the
other, creating an overall fair agreement.  The representative noted,
for example, that while deliveries for the orders we reviewed were
near the negotiation dates, the memorandum's rates also would apply
to orders with deliveries more than 2 years in the future, where
minimal costs have been incurred.  In addition, the representative
stated that a significant number of parts would be undergoing design
changes because a baseline configuration for the C-17 did not exist. 
The representative explained that McDonnell Douglas is responsible
for replacing spares affected by design changes until 90 days after
reliability, maintainability, and availability testing, which was
completed on August 5, 1995, and that any additional cost for such
replacements would have to be absorbed by McDonnell Douglas. 
Finally, the representative noted that the minimal cost history on
C-17 spares would indicate a higher than normal contract type risk. 

We have no evidence to support the DPRO official's view that profits
based on the rates in the memorandum of agreement would balance out
over time.  In fact, DCMC let the agreement lapse and will calculate
profit objectives and negotiate profit rates on an order-by-order
basis.  In addition, we noted that McDonnell Douglas initially
received a 2-percent warranty fee on contract-2109 orders to cover
both the risk of design changes and provide a standard 180-day
commercial warranty.  Furthermore, the profit agreement stated that
McDonnell Douglas could submit additional warranty substantiation at
any time and, if the data supported a different percent for warranty,
the government would consider adjusting the percentage.  Thus, the
warranty fee is the contract mechanism the parties agreed to use to
address the risks of replacement parts because of design changes. 


      PERFORMANCE RISK FOR BUY
      ORDERS
---------------------------------------------------------- Letter :5.2

The contracting officer, in developing a profit objective for buy
orders (complete spare parts purchased from an outside vendor) under
contract-2109, used a higher rate for performance risks than was
warranted. 

The DFARS' weighted guidelines provide both standard and alternate
ranges for the contracting officer to use in calculating performance
risk, which is the component of profit objective that addresses the
contractor's degree of risk in fulfilling the contract requirements. 
The standard range applies to most contracts, whereas the higher
alternate is for research and development and service contracts that
involve low capital investment in buildings and equipment.  The
guidelines provide that if the alternate range is used, the
contracting officer should not give any profit for the remaining
component, facilities capital employed, which focuses on encouraging
and rewarding aggressive capital investment in facilities that
benefit DOD. 

DCMC officials said that the alternate range was used in calculating
the performance risk component on contract-2109 because McDonnell
Douglas' system could not provide an estimate to be used for purposes
of calculating the facilities capital component.  DPRO officials said
that since the negotiation, McDonnell Douglas has developed the means
to estimate facilities capital employed on its spares proposals. 
They said that using the standard range for performance risk and
including facilities capital employed for spares orders yields a
profit objective that is substantially the same as the profit
objective calculated using the alternate range for performance risk. 
DOD concurred that DPRO should not have utilized the alternate range
for performance risk, but repeated the DPRO's assertion that using
the standard range and including facilities capital employed yields
essentially the same results. 

We reviewed DCMC's data and found that using the alternate range for
the performance risk component does not result in a substantially
similar profit objective to that calculated by applying a factor for
facilities capital employed.  The contracting officer's use of the
alternate range for performance risk, combined with the use of a
fixed-price value for contract type, led to the negotiation of a
profit rate of 10 percent for the buy orders; in contrast, we
calculated that using a cost-type contract risk factor, the standard
range for performance risk, and McDonnell Douglas' estimate of
facilities capital employed would have resulted in an overall profit
objective of 6 percent for the buy orders. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :6

In commenting on a draft of this report, DOD said that it had taken
appropriate action to address our finding of overpricing.  In
addition to recovering $182,000, DOD indicated that DPRO at McDonnell
Douglas will now screen all spares orders containing items to be made
in-house to (1) look for possible conversion to buy items and (2)
ensure that labor data is correct for all items made in the St. 
Louis Division.  Moreover, DOD stated that DPRO no longer relies on a
single profit analysis and, by completing a separate analysis for
each order, DPRO will address the contract risk associated with each
order. 

DOD acknowledged that it is possible to take issue with the
contracting officer's selection of risk factors and that DPRO should
not have used the alternative range for performance risk in its
profit analysis.  However, DOD asserts that it would be misleading to
infer that unjustified profits were paid to the contractor.  We do
not infer that the contractor received $860,000 in unjustified
profits.  Determining the appropriate amount of profits is a matter
to be negotiated between DPRO and the contractor.  However, we noted
that (1) lower rates were justified under the weighted guidelines and
(2) rates of 6 percent for purchased parts and 13 percent for parts
made in-house could be justified.  While the results of our review
cannot be be projected to all C-17 spare parts, using the lower
profit rates for the $29 million of negotiated spare parts orders as
of May 31, 1995, would have reduced the company's profit by $860,000. 

Our subsequent analysis raises some questions about the DOD statement
that DPRO, by making a separate profit analysis for each order, will
address the contract type risk associated with each order.  Our
review of an order negotiated in January 1996 based on a separate
profit analysis indicated that the DPRO's profit analysis continues
to not reflect the reduced risk when most costs have been incurred
prior to price negotiations.  While the negotiated profit rate was
8.6 percent, or 1.4 percent lower than the previously negotiated
rate, the amount of profit allowed for contract type risk continues
to appear higher than justified by the weighted guideline and DFARS. 
In this regard, DPRO noted that McDonnell Douglas' cost "amounts to
only 46 hundreths of one percent" and "you are being paid all your
costs and the parts have already been shipped, thereby reducing your
risk to a very low degree." However, the contract risk factors were
at the midpoint range and higher for a firm, fixed-price contract. 
The stated reason for this was that the design could change,
necessitating a recall.  While DPRO discontinued using the memorandum
of understanding profit rates, we remain concerned that the
negotiated profit rates may not reflect the reduced contract type
risk when essentially all costs have been incurred. 

DOD's comments are reprinted in their entirety in appendix III. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

To select spare parts for our review, we analyzed reports developed
by McDonnell Douglas' data system that included historical and
current information on spare parts orders--for example, the
negotiation date, negotiation amount, and delivery date on
current/previous orders.  For our review, we only considered spare
parts orders for which prices had been negotiated as of May 31, 1995. 
As of that date, prices for orders involving 696 spare parts had been
negotiated, with a value of about $29 million. 

We selected spare parts for a more detailed review based on
current/previous cost, intrinsic value, and nomenclature.  Our
selection of parts was judgmental and our results cannot be projected
to the universe of C-17 parts.  We reviewed the contractor's and the
DPRO's contract and pricing files, and discussed the pricing issues
with selected contractor and DCMC officials.  As a result of rather
significant cost increases for a number of spare parts that had the
manufacturing/assembly effort transferred to the contractor's plant
in St.  Louis, we obtained additional documentation from the
contractor's plant in St.  Louis and DPRO. 

We reviewed the DFARS guidance relating to the use of weighted
guidelines in establishing a profit objective.  We also reviewed the
memorandum of agreement that was negotiated by DPRO for contract-2109
and discussed the basis for the negotiated profits with DOD and DPRO
officials.  In assessing the value assigned to contract type risk, we
reviewed data on
95 spare parts with a total negotiated price of about $3 million out
of
696 spare parts with a total negotiated price of about $29 million,
or about 14 percent of the parts.  Our review of selected spare parts
cannot be projected to all C-17 spare parts.  However, to illustrate
the potential effect of lower profit rates, we calculated a potential
reduction using spare parts orders negotiated as of May 31, 1995. 

We conducted our review between November 1994 and September 1995 in
accordance with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :7.1

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its issue date.  At that time, we will send copies to the
Secretaries of Defense and the Air Force; the Director, Office of
Management and Budget; and other interested parties.  We will make
copies available to others upon request. 

If you or your staff have any questions about this report, please
contact me on (202) 512-4841.  The major contributors were David
Childress, Larry Aldrich, Kenneth Roberts, and Larry Thomas. 

Sincerely yours,

Louis J.  Rodrigues
Director, Defense Acquisition Issues


COMPARISON OF COSTS AND PRICE FOR
PARTS PREVIOUSLY PURCHASED
COMPLETE FROM SUBCONTRACTOR
=========================================================== Appendix I

                               Cost to buy                       Price
                                      from         McDonnell        to
                              subcontracto          Douglas'       Air
Part name                                r    estimated cost     Force
----------------------------  ------------  ----------------  --------
Hinge, inlet door                      $31            $1,745    $2,187
Hinge, access door                      31             1,716     2,151
Hinge, access door                      47               862     1,091
Hinge, access door                      45             1,169     1,447
Hinge, access door                      45             1,498     1,855
Hinge, access door                      82             1,339     1,664
Hinge, access door                      90             1,421     1,783
Hook, cargo door                     1,763             6,992     9,937
Hook, cargo door                     1,763             7,003     9,951
Handle, door                            60               946     1,206
----------------------------------------------------------------------

COMPARISON OF COSTS FOR PARTS WITH
MATERIAL FURNISHED BY MCDONNELL
DOUGLAS
========================================================== Appendix II

                                            Cost to
                                        manufacture            Cost to
                                                 by        manufacture
                                     subcontractor\       by McDonnell
Part name                                         a          Douglas\a
-----------------------------------  --------------  -----------------
Hook, cargo door                               $369             $1,356
Hook, cargo door                                369              1,553
Hook, cargo door                                369              1,512
Hook, cargo door                                369              1,595
Hook, cargo door                                369              1,471
Hook, cargo door                                369              3,286
Hook, cargo door                                369              2,420
Hook, cargo door                                369              2,507
Hook, cargo door                                369              1,553
Hook, cargo door                                369              1,553
Hook, cargo door                                369              1,575
Hook, cargo door                                369              1,471
Hook, cargo door                                269              3,305
Hook, cargo door                                269              1,463
Hook, cargo door                                269              3,677
Hook, cargo door                                269              3,677
Hook, cargo door                                389              8,630
Hook, cargo door                                389              8,842
Hook, cargo door                                200              1,424
Hook, cargo door                                389              2,493
Hook, cargo door                                369              2,256
Hinge assembly, spoiler                       4,998             22,638
Hinge assembly, spoiler                       4,998             21,661
----------------------------------------------------------------------
\a Excludes cost of material. 




(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


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